I had 1-3-2 butterfly on COST the other day. It expired in one week, I put it on on Monday. It was OTM by about 3% which was what I expected it to be by Friday. The Risk/Reward was great, if it went up to my sweet spot, I'd make max profit, but if it stayed down, I'd still make $.03 per contract. My highest risk was just on the upside. If it went up past my strikes, I'd lose.
By Thursday, it was exactly where my shorts were, but I was down money instead of being up.. Despite the fact that I only had one day left till expiration. Since I'm using Robinhood, I don't exactly have the tools to see where my greeks were at the time when I bought it and when it was at my "sweet spot".
Usually I'm assuming Vega is the culprit but it gets very confusing in butterflies. Do OTM and ATM butterflies want different IV's? I know textbook long butterflies, you want high IV, but that's ATM. When you enter OTM butterflies, do you want high IV as well? Do modified and textbook butterflies share the same requirements? I wish I can plot out my greeks and find out exactly why I was down money one day before expiration. I don't care about the money, but my curiosity is killing me.
I'm smart enough to know I'm playing the lottery if I were to hold these things to expiration. Come to think of it, would I have made money if I just did a short modified butterfly instead? Ofcourse. But that's beyond my understanding.
Have any of you traded OTM butterflies before?
byu/How_Much2 inoptions
Posted by How_Much2
1 Comment
I don’t think it was about the modification; you simply shouldn’t hold these until expiration. I trade a lot of butterflies, and sometimes I use the 1/-3/2 ratio, but I always realize the profit before expiration. I wrote an[ educational article](https://tanukitrade.substack.com/i/147847839/gld-bullish-strategy-if-we-are-expecting-falling-iv) last week. See the gifs and how the profit curve changes over time.